Weekly Valuation: Alleghany Corporation

Summary

Market cap: 11.39 billion USD
Our valuation: 12 — 15 billion USD with Cost of Equity of 8.9%

Main opportunities:

Warren Buffet’s Berkshire Hathaway announced that it will acquire Alleghany.
Alleghany’s shares rose about 25%
The company more than 85 years old and still family-run

Main threats:

Alleghany has a right to resign the deal for 25 days
Berkshire’s offer was 29% above the prior 30-day average stock price

Analysis:

While the stock market is strained by the Ukraine crisis and Covid, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) is climbing to new all-time highs, sending the price of its Class A shares over the $500,000 mark for the first time. Many have feared in recent years that Berkshire and its CEO Warren Buffett may have lost their sense of great investing. Last week, however, the investing legend sought to disprove that fear, announcing a new acquisition that shows Buffett’s interest in smart businesses remains undiminished.

Berkshire’s target was Alleghany Corporation (NYSE:Y). Shares of the insurance company rose more than 25% in pre-market trading on the day of the announcement.

Given Berkshire’s offer, it’s easy to see why Alleghany agreed. The deal between the Omaha-based insurance giant and its New York-based counterpart values Alleghany at $11.6 billion, with Alleghany shareholders to receive $848.02 per share in cash.

By some standards, that may seem expensive, representing a 29% premium to Alleghany’s average share price over the past 30 days and 16% above its 52-week high. However, it is only about 6% higher than the peak price of around $800 per share that Alleghany reached towards the end of 2019.

To be clear, the purchase is not yet a done deal. Alleghany has 25 days in which to seek alternative takeover bids. Of course, a bidding war would not be a good outcome for Berkshire. Executives at both companies, however, stressed that the two companies are a natural fit. Buffett pointed out that he has been watching Alleghany for 60 years and has formed a friendship with Alleghany CEO Joe Brandon. The Berkshire CEO also pointed to the family-led nature of Alleghany, whose chairman Jefferson Kirby noted the significant shareholder presence the Kirby family has had in the company for more than 85 years.

Looking at Alleghany, it’s easy to see major parallels with Berkshire Hathaway. The two have a similar diversified business structure, as Alleghany has a core position in property and casualty insurance and reinsurance.

Do you think that Berkshire took the chance to prove their reputation of doing great investments? Let us know your thoughts and as always, you can find the details at the link below.